Harmoney loan re-writes 23


If you missed my previous post on the performance of our Harmoney account, you can check it out here.

Analysis of Harmoney performance has alerted me to the recently introduced practice of loan re-writes.

The below is Harmoney’s explanation of their re-write process. This information is quoted directly from Harmoney’s response to an email that I sent them.

What is a loan rewrite?

In short, it means that the borrower has requested to increase the amount they have borrowed.

Harmoney offers this option to creditworthy borrowers who have demonstrated a reliable repayment record for a minimum of three months, allowing borrowers to extend their loan amount up to their maximum approved limit.

How does a rewrite work?

When borrowers apply to top up their loans, the loan contract terms must be changed, therefore the original contract becomes void. For this reason, borrowers must have the new loan total (original loan outstanding amount + top up amount + platform fee) fully funded by investors.

Once the new loan total is funded, the outstanding balance of the original loan is paid back to investors, and the borrower receives the top up amount. The original loan is then considered repaid and closed.

In the event that a rewrite does not reach full funding on the marketplace, the borrower’s original loan continues without change.

What happens when a loan I have invested in is rewritten?

You will be repaid the outstanding principle and interest, less the service fee. The repaid funds will be available in your account for withdrawal or reinvestment.

An investors interest income will always exceed the amount of service fees incurred because a rewrite can only occur after 3-months of consecutive payments that are on-time and in full.

So what are the advantages and disadvantages of re-writes?

From the Borrower’s Perspective..

How is eligibility for top-up assessed?

Isn’t the borrower already offered the maximum limit at the time the original loan is set up?

Will the re-written loan be at a higher grade and interest rate due to the same income, but higher debt level?

Isn’t it then cheaper for the borrower to keep the original loan and get a second small loan somewhere else for the extra?

From the Investor’s Perspective..

Investing has become far less passive.  The investor now has to check every couple of days for paid off notes that need to be reinvested, otherwise unplaced notes are not earning any interest.

Re-writes have an adverse effect on interest rates as every paid off loan incurs a service fee on principal as well as the interest received. The service fee on every paid off note is a minimum of 31 cents (1.25% of $25) regardless of how much interest has been received.

An investor also needs to take into account the downtime of funds whilst they are waiting for a loan to fund (not earning interest) and then there is the first month of the loan before any interest is received.  Re-writes will mean a lot more downtime for investors before seeing any actual return on their money.

From Harmoney’s perspective:

Harmoney are charging the borrower a fee for the original loan and then another fee for the top-up.

Harmoney are also charging the investor the service fee on the original loan and then charging the new investors the same service fee on the re-written loan.

The way I see it, the only winner is Harmoney!

What can be done about this?

If you are a borrower, be sure to shop around if you need a loan top-up.  Having all your debt in one place might be convenient, but if it is all at a higher interest rate simply for convenience, it is not worth it!  If the extra amount you need can be satisfied by a credit card then you might want to consider setting yourself up to take advantage of the banks’ competitive balance transfer offers.

If you are already in need of extra funds, paying another loan set-up fee is not going to help your situation.  A credit card is also likely to be cheaper in this regard too.

You do need to be disciplined though to pay the card off!

If you are an investor, choose the highest risk loans.  This is to minimise your exposure to re-writes as you would assume that those already in the highest risk bracket must be borrowing the maximum they can afford based on their incomes.  These higher risk loans also offer the highest interest rates so that you stand a better chance of getting a decent return even if the loan is paid off early.

If you take the lowest risk loan, an A1 grade paying 9.99%, a rough calculation would show that you would get around 62 cents in interest after 3 months.  If this loan were to be re-written at the 3 month mark then Harmoney would take a service fee of 32 cents, so you only gain 30 cents before tax.  Although, tax will be calculated based on the 62 cents that you have earnt (with no regard to Harmoney’s service fee), so you’re being ripped off in this respect too! At a return of 4.87% before tax it is still better than the bank, but probably not worth the hassle of constantly checking your account and placing notes?

The spreadsheet below shows the effect of a 3 month re-write on the investor’s interest rate.

Rewrite effect

A graph of the data shows that for an annual 20% return, allowing for re-write possibility, you’d want to choose an E2 or riskier investment.  Be aware that this doesn’t factor in anything for default risk, so you’d be looking well into the F grades to cover default risk as well as early repayment/re-write risk.

Rewrite effect graph

 

What can Harmoney do to reduce the impact of re-writes on investors?

Whilst I acknowledge that Harmoney needs to make money to stay in business, they also need to consider both their borrowers and investors and see if there is a way to make re-writes more attractive to both sides.

For a start, I believe that service fees for loans that have been paid off as re-writes should be nil.  The reason I say this is because Harmoney are double-dipping with these fees as the new loan is for more than the old loan, so they will get their fees when the new re-written loan is paid off.  If Harmoney want to rewrite loans so that they start again for 36 or 60 months, then Harmoney will have to wait longer to get their service fees.  The simple fact is that the original investor is not getting the service that they are paying the fee for.  The original investor took a contract in a note for 36 or 60 months, with the risk that the borrower could pay it off at any time without penalty.  The problem is that the borrower is not paying the loan off, Harmoney is.

Although the service fee is small, it is the principle that gets my hackles up a bit.

Re-writes are creating a more active investment for investors who like to choose their own loans to invest in.  We have stopped putting money into Harmoney for the moment to see what, if anything, changes with the re-write system.

It would be very helpful for investors if the original loan ID had a link to the re-written loan so that we can see how much extra the borrower has accepted, and at what grade/interest rate.  Vice versa for the re-written loan.  The new investor should be able to see the details of the original loan so that there is full transparency.

I’d like an alert on re-written loans advertised for funding if they are at the maximum top-up limit.  This would give the investor confidence to invest in that loan without the risk of a further re-write.

I’d also like Harmoney to consider why they have chosen 3 months as the time period before offering a top-up. Three payments hardly constitutes a good track record.  Perhaps a year would be more palatable to investors?

—–

I don’t mean this post to slam Harmoney, but these are genuine concerns that I have as an investor, and I believe it useful for others to also be aware of the re-write situation.

As an investor, your Harmoney investment is still likely to have a better return than having a term deposit with a bank, it’s just not quite as good as Harmoney would have you believe.

You need to be aware that Harmoney loans are no longer passive investments.  I believed that we were locking our funds up for 36 or 60 months and only expecting a small portion back each month in repayments and interest.  Due to re-writes, you would be unwise to leave your account unchecked for long periods of time.

Please add your comments below if you have questions, or solutions, for Harmoney on the issue of re-writes.

 

 


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23 thoughts on “Harmoney loan re-writes

  • Sanketh

    Hi Meg.. well articulated. I do feel Harmoney is doing a double dip and should not charge investor if loan is paid of early and also waive the fees to reinvesting the early payments. From a investor perspective, Harmoney will charge when you invest, charge again when it is repaid and also charge once if you choose to reinvest.So, basically for same out investor is charged 3 times and yet makes no reasonable returns.

    Also there should be a minimum time period a borrower has to repay interest for. As of now, it looks like Harmoney is actually encouraging borrower to refinance the loan after 3 months, so it can double dip.

    Cheers
    Sanketh

    • Meg Post author

      Hi Sanketh,
      Thank you for your comment. From our experience, Harmoney only charge investors a service fee of 1.25% of any payment. The service fee is calculated based on principal and interest, so if not much interest is earned then we are being unfairly charged on the principal which should have been invested for a longer term, rather than rewritten after 3 months.

      Borrowers pay a fee to receive a loan through Harmoney. They pay for their initial loan set up and another fee if they take a top-up (rewrite).

      I do believe you are correct that Harmoney are encouraging borrowers to top up their loans. It seems from the recent spike in numbers of repaid and rewritten loans, that Harmoney have sent out an offer to their borrowers.

      Harmoney will be wanting the fees from the borrowers, which are more substantial than those that they charge their investors. It seems that Harmoney are encouraging the ‘churn and burn’ effect and as an investor, I don’t think this is fair.

      Kind regards,
      Meg

  • Tom

    Hey thanks for the articles.
    I have been thinking of investing in Harmoney, so these articles are greatly assisting me in how the mechanations of there business.
    Especially about the loans being re-written.
    I think if you’re going to invest in the lower risk areas, its just a matter of constantly monitoring your account too ensure that your money is always invested and not sitting in the zero interest account waiting to be re-invested.

  • Alan Coates

    You do forget one thing as far as an investor is concerned. And that is the interest rate that an investor gets is better than anything you can get from Banks or finance companies. So what if rewrites happen – you lose a little bit of interest – and you are getting over 13% interest before? Better than 3.75 at the bank.

    • David

      Second to last paragraph Alan 🙂

      “As an investor, your Harmoney investment is still likely to have a better return than having a term deposit with a bank, it’s just not quite as good as Harmoney would have you believe.”

      Keep reading the posts and comments to appreciate the issues and investor concerns regarding (totally out of the blue) rewrites. Personally I am appalled at the attitude taken by Harmoney towards it’s investors. Bring on the competition!

      Peace.

  • Alan

    Hi Meg, I am 100% with you on the Harmony rewrites – there should be no fees charged to the investor. My wife has been investing with Harmoney since January and with the rewrites now, the effective fees are 5.7% (of course way above the 1.25% that she was expecting). Out of 33 loans, 5 have been paid off and I assume most if not all of these have been rewrites. As a matter of principle, she has not invested in any rewrites.

    We also have concerns about how hard Harmoney chases the defaulters. We have one borrower who has not paid anything since the end of July. We have no idea what is happening but the fact that nothing has been paid at all suggests not too much action is happening. If no further payments are made, will the outstanding principal be deducted from the Harmoney interest income before tax as this has effectively reduced the taxable income?

    Our final gripe is that Harmoney used to have a facility where an investor could chat online to ask questions about your investment etc. This seemed to vanish a few months ago.

    We are certainly starting to lose our initial enthusiasm for Harmoney. As David said a week ago bring on the competition and we’ll quickly stop reinvesting in Harmoney! Thanks for the opportunity to comment.

    • Meg Post author

      Hi Alan,

      Thanks for your comment. It seems that many investors are really feeling the effect of the rewrites. Apart from the seriously reduced return and the double-dipping in fees, there is also the time factor. Investors have to commit to a loan for 36 or 60 months, and yet the loan might only run for 3 months. The lost opportunity cost is huge and having to check the account all the time to try to find other suitable loans to reinvest in is quite frankly a pain in the butt. Anytime a loan is rewritten now, I withdraw the funds. I have had a quick look to see if there is a similar loan to reinvest the funds into, but more often than not there isn’t.

      The only problem that I can see with your wife not choosing rewritten loans to invest in is that any new loans are likely to become rewrites in a few months anyway, so she is potentially setting herself up for a lot of rewritten loans further down the track. One way I thought I could avoid having so many of my loans rewritten was actually to take the opposite view and choose those who have already accepted a rewrite. Problem with this idea is that I have found most of them have a repayment amount far higher than I am comfortable with. It seems that Harmoney are very free with their loan offers – probably because the money at risk is that of the investor. Of late there hasn’t been much that meets my criteria.

      Yes, I am very concerned about the number of defaults. Loans seemed to be written off very quickly. I have currently had $75 written off and have another $25 in default. I can’t see where Harmoney’s motivation to chase these loans would come from. What do they gain by spending resources chasing slow payers? It doesn’t instil confidence.

      Your tax question is a very good one. As far as I know the lost principal does not reduce the taxable interest in the eyes of the tax department. But, we should check this out!

      I hadn’t noticed that the online chat has been disabled. 🙁

      I will keep you posted on any new P2P lenders who start up. I am itching for an alternative to try out – and write about. 🙂

      Thanks for your comment!

      Cheers,
      Meg 🙂

      • Maree

        I am just starting at looking into P2P lending. Has anyone had any dealings with Squirrel Money. Flat fee of 2% per annum so no surprises and they currently have a fund set aside to pay lenders for any payment defaults. (Incentive for them to collect overdues)

        • Meg Post author

          Hi Maree,

          Thanks for your comment. I have yet to thoroughly investigate the opportunities with Squirrel. I do like the way that they seem to have considered their fee/business structure to give investors a bit of reassurance. Be interesting to see if anyone else has experienced Squirrel P2P yet.

          Cheers,
          Meg

  • David

    Being investing with Harmoney for 3 months and so far have had 5 rewrites. Two of which were before any interest had been paid. The result has been that the fee paid to Harmoney has been around 5% not 1.5%. I find the approach taken by Harmoney to be unacceptable as they are charging a fee for a service not provided ie. they charge a fee for service that was meant to be 60 months of service in only one or two months. Obviously for Harmoney they would probably like to see every loan rewritten as this substantially increases their income in the short term.

    Someone asked a question about defaults and id this is taken off the interest earned. My understanding is that Harmoney refers loan defaults to a debt collection agency. If as an investor you find that a loan is written off then that loss is available to you as a tax deduction as it was incurred in gaining accessible income just as Harmoneys fees are also deductible.

  • Mike Brown

    Harmoney need to be careful about their double dipping on Investor fees for re-writes or the investors like me might just decide not to invest in re-writes.Whilst this doesn’t stop the loss on the original loan it will certainly make borrowers think twice about a rewrite.

    • Meg Post author

      Hi Mike,

      My main concern is the size (and limited serviceability) of these rewritten loans. Some of them are huge. I worry about how well Harmoney are checking creditworthiness. Harmoney appear to have a conflict of interest when the majority of their revenue is generated by churning many new (or rewritten) loans.

      Cheers,
      Meg

      • Mike Brown

        My other concern is the Arrears and how they are handled by Harmoney . I have one loan that has been in arrears for 5 months with no communications from Harmoney as to what they are doing about it .This loan should be in the hands of the debt collection agency by now and it would be good to know that this is the case .How do I know that this is the case ? For all I know Harmoney could be doing nothing and after 6 months simply say you have lost your principle and its charged off .Lack of good communications creates suspicion in Investors.I think Harmoney has to pay more attention to its investors. The honeymoon period is over and the negative press needs to be addressed if they want to keep and encourage further Investment .

  • Bryan

    I don’t understand why Harmoney says a further loan to a borrower has to be done by voiding the original loan (see above). Treating the new advance as a separate loan would go a long way to address the combined effect of early repayment and fees on lenders.

    • Meg Post author

      Hi Bryan,
      Thanks for your comment. I did ask Harmoney this question and they said that they were not permitted (under their license) to issue a second loan – they had to close off the first loan and issue a whole new one.
      The second loan would still create issues because the investor in the first loan is still exposed to a borrower with a higher level of debt – once they’ve taken out a second loan. I suppose that the borrower could be borrowing from somewhere else though (other than Harmoney) and the investor would be none the wiser.
      Cheers,
      Meg

  • David

    Does anyone know if rewrites were covered in the terms and conditions we all had to accept to become lenders? I know its stated that the borrower can repay early and the 1.25% fee will be charged on the total principle and interest however a rewrite isn’t really the borrower paying off the loan is it. I would be very surprised if any court would see a rewrite as the borrower repaying the loan and so possibly Harmoney is charging us a fee which would not hold up in court. Just seen I’ve had another rewrite. In some respects its good to have them out of my portfolio as people who borrow more after just 3 months just because its offered are probably not the best credit risks. When choosing loans to invest in I never invest in rewrites.

    • Meg Post author

      Hi David,

      You make a really good point. I don’t believe that rewrites were mentioned in the initial terms and conditions, but there was probably something in there to say that Harmoney could change the terms and conditions. I do believe that investors should have been given notice of the change though – not that that would really have helped much!

      Cheers,
      Meg

    • Matt

      Actually the borrowers engaging in a rewrite are the better credit risks as they have a track record of paying on time. When you loan money you are unsure if the person it a good credit risk or a future defaulter. The fact that harmoney is removing these loans from your portfolio increases the overall credit risk of your portfolio of loans. As harmoney has their own institutional funds available to lend, I suspect they are using the rewrites to channel some of their own funds to good credit risk clients, as well as double dipping on fees.

      • David

        Looking at the current loans available I’m appalled by the number and amount of rewrites. One is up for rewrite after making only one repayment and another says its to consolidate debts (so what was the purpose of the first loan). Also Im seeing more payments falling into arrears with one not having made a single repayment. Of course Im given no information about what has been been done for recovery. Sorry Harmoney but from now on all available funds will be withdrawn as they become available I just don’t like your business model.

        • Bryan

          I started with Harmoney on 20th December 2015. One loan has been “paid off”. How do I know whether it was genuinely repaid early or rewritten? I acknowledge the end result is the same either way, but I would like to know which it was.

          • Meg Post author

            Hi Bryan,
            I don’t think there is any way that you can tell. I wish that there was. Perhaps if you click on that paid off loan it should actually tell you whether it was re-written? I doubt Harmoney would offer this feature though because they don’t want to make the re-writes anymore obvious than they already are. There is no advantage to Harmoney in offering this information, so I don’t think there is much point in us holding our breath.
            Cheers,
            Meg

  • Stevo

    FWIW, Harmoney’s Mark Bardi sent me the response below, when I asked them about the fairness of rewrites for investors:

    “We understand that our investor community has been disappointed with our fee policy on rewrites. The senior management team is in the process of designing a new pricing structure and part of this change will include removing any service fees on rewritten capital. We want to ensure our interest remain closely aligned with our customers.”

  • Mike Brown

    We have watched with interest the number of rewrites and the new investor pricing structure which we will not be signing up to .Three of us invested about 9 months ago and all of us have decided to pull out our funds as they become available . With the number of rewrites happening this is a faster process than we expected. We are also dissatisfied with the way arrears are treated as the process they are being put through are not transparent to the investor . For example we don’t know when the loans in arrears are handed to the debt agencies and we don’t know if Harmoney actually follow up on late payments or not . Their process says they do but how does the investor know what processes are being followed on their loans ? It would be interesting to talk to some borrowers who are in arrears to see what actually happens .